South Africa economy: Enduring policy conundrums

Clarifying uncertainties and embracing reforms have been key policy objectives since the ruling African National Congress (ANC) installed Cyril Ramaphosa as president in February in place of the corruption-tainted Jacob Zuma. However, progress to date has been uneven, with advances in some areas, such as pushing through delayed private power projects, offset by conflicts in others, such as expropriation without compensation. Remoulding policy platforms after a long period of drift and inconsistency will take time, but the government is also battling vested interests, ranging from the corrupt networks that spread under Mr Zuma to radical trade unions that view the private sector with suspicion. Heightened political sensitivity in advance of the 2019 general election adds a further complication, as the government seeks to limit the appeal of Julius Malema's radical, populist Economic Freedom Fighters.

Land reform and the government's stated commitment to expropriation without compensation—in line with official ANC policy—are probably the most contentious of several key policy issues. Handled badly, the resulting threat to property rights could have a chilling impact on investment, private-sector confidence and growth. Alternatively, if expropriation without compensation applies in limited and clearly defined circumstances only, the potential damage will be far smaller. In a fairly positive step, the ANC's national executive committee, in late May, decided to establish whether expropriation without compensation is permissible under the existing constitution, perhaps via a test case in an urban area, which would obviate the need for a contentious constitutional amendment. A relevant clause could then be reinserted in the stalled expropriation bill, which the ANC will now revisit. If the courts determine that the current constitution allows for expropriation without compensation, the framework would impose much clearer limits—thereby limiting the threat to property rights—than if the government embarked on fraught and risky constitutional amendments. Given the complexity and sensitivity surrounding land, substantive new legislation may not emerge until after the 2019 election.

The national minimum wage

A second key issue, albeit a slightly less contentious one, is the proposed national minimum wage, which moved a step closer in late May when the National Assembly approved the relevant bill, before passing it to parliament's upper chamber. The law will see the introduction of a R20 (US$1.50) per hour minimum wage, with partial and temporary exemptions in agriculture and domestic service, which would give a significant boost to the lowest-paid workers. Concerns about damage to job creation are legitimate—as the national minimum wage is a clearly an experiment—although the accompanying reforms to other labour laws, including the greater use of pre-strike balloting, will potentially benefit business by reducing instances of industrial action. Radical unions will continue to fight the package, although we believe it will be implemented well before the next election, given the national minimum wage's vote-attracting potential.

Energy and renewables

The most positive reform to date under Mr Ramaphosa was the belated signing of the next set of renewable energy projects with independent producers (worth almost R56bn) in early April, which had been blocked by Mr Zuma, who favoured the nuclear power option, despite the prohibitive costs. Moreover, the Department of Energy plans to run a new, fifth bidding round for new projects later in 2018, giving a further boost to renewables and to ancillary manufacturing and service activities. However, radical (and even some moderate) trade unions are deeply fearful about the possibility of renewables leading to job losses at Eskom (the debt-ridden power parastatal), and are equally resistant to government plans for Eskom to work more closely with the private sector, which could stymie broader energy sector reform. The outlook will become clearer with the long-awaited update to the Integrated Resource Plan, which may now materialise in August.

The mining charter

Hopes that the latest rewrite of the new, draft mining charter, unveiled in mid-June, would clarify uncertainties besetting the sector were only partly realised. The government made one key concession, by accepting the "once empowered, always empowered" principle, meaning that firms which previously reached the 26% threshold for black ownership, before the new black owners sold their shares, will not be penalised. However, the charter also lifts the black economic empowerment threshold to 30%, including a 5% free carry stake for both local communities and workers, which threatens the viability of new projects. Other clauses covering employment equity and procurement rules are similarly onerous. Consultation will continue, including at a stakeholder summit in July, but unless the government makes further concessions, the investment drought in mining may persist.

National health insurance

Adding to the list of policy conundrums, the health minister, Aaron Motsoaledi, unveiled two key bills in June—the national health insurance (NHI) bill and the medical aid schemes bill—heralding a major overhaul of South Africa's dysfunctional healthcare system, which is marked by costly private provision for rich and second-rate public provision for the poor majority. Reform is clearly needed but whether the government's plans will have an adverse or beneficial outcome depends on a host of uncertainties, especially as the legislation is at a very early stage. The NHI bill, in the first instance, aims to establish a single national fund to procure health services for all South Africans, from both private and public providers, with the rich making a greater contribution than the poor. The accompanying bill aims to clarify how existing medical aid schemes will fit into the new framework. Initial reaction to the bills by private providers has been fairly muted, partly because of the paucity of clear details, although the potential cost to the already overstretched fiscal accounts is a clear downside, as is the risk of corruption in a more-centralised system. The bills are now open for a three-month public consultation—the long duration explained by the complexity of the issue—which could lead to significant adjustments to the draft plans. A pending (and long-delayed) report into private health provision by the competition authorities will also feed into the legislative process. The ANC will hope the initiative is a vote winner, even though the new laws are unlikely to be finalised before the 2019 election.

Two common themes characterise the policy dilemmas facing the government. The first is reconciling the imperatives of socioeconomic transformation—in one the world's most unequal nations—with those of growth, which is clearly shown in debates about the mining charter. Transformation without growth and growth without transformation both pose risks to social stability, but fudging the issue means neither goal may be satisfied. The second, related challenge is matching the government's (and the electorate's) aspirations with South Africa's narrow tax base, as illustrated by the national health insurance debate. The slow-growth years of Mr Zuma's administration deepened the crisis; popular aspirations have continued to rise but the government's ability to meet them has declined. How the government reconciles the policy conundrums will have a major impact on South Africa's future prosperity and stability. Mr Ramaphosa represents the best—and perhaps final—chance for South Africa to resolve the conundrums, although global uncertainties fuelled by US‑led protectionism will not make his task any easier.